No matter how busy I get, I am going to try to do some semi-long form writing every week. Writing is one of the ways I organize my thoughts and keep myself sane. The writer, Chuck Klosterman, once said this of himself on a podcast and I’ve remembered it ever since because I’m the same way:
“I often don’t know how I feel about something until I write about it.”
While I generally write for myself, occasionally I do enjoy putting my writing “out there” to see what kind of response it solicits from the world wide unknown. It’s fun! It’s also a good barometer to see how in-sync I am with the general masses writ large. I formerly posted to FB but have found engagement on that platform to be quite low. So recently I’ve taken to Reddit where I’ve found, probably due to the anonymous nature of that site, the engagement to be much higher. Surprisingly, the comments are generally more insightful, helpful, and civil.
So here’s my writing for this week where I wrote about my undying affection for the TV show, Billions, which airs on Showtime. As a fun aside: This show launched in Jan 2016 and was the inspiration for first piquing my interest in day trading! That’s when this whole adventure began!
Relying on day-trading as one’s sole means of daily income possesses several financial implications. One of which is that your bank balance and daily/weekly/monthly cash flow can be highly unstable and uncertain. I’ve only been day-trading for five months but have already been forced to endure lengthy down-stretches. Statistically and historically, the models almost always tell you that your positions will recover. But believing that –especially during huge rocket rides or death slides– and practicing the discipline to hold your positions in the face of unrelenting onslaught are two totally different things.
It’ll be useful before proceeding further to first clarify a few points though. Again, these are simply the practices which have worked for me. These are not recommendations, etc.
Since income from day-trading is always uncertain, it engenders both “save for a rainy day” and “if we got it, spend it” mentalities. There is nothing more frustrating than being frugal and saving tons of money over a long period of time (say, many months) only to have those hard-earned savings all incinerated in a single swoop by an unexpected market downturn in a single day or week. Conversely, because sudden plunges could happen any time, that’s also why I’m not extremely leveraged (2:1, at most, and only for short periodicities). Remember, assuming you’re leveraged even at a modest 2:1, if your holdings decline by 50%, then you’re entirely wiped out. (For reference: LTCM was leveraged as 25:1 at the time of its collapse). Also, generally speaking, even if you’re not leveraged, if you lose 50% one year, you’ll need to make 200% the next year just to get back to even. Thus, whenever I see a hedge fund manager having a terrible run, losing 30% or even as much as 50% during a bad stretch, I’m never impressed when they rebound 40% the next year. If you lose 30% in one year, you’ll need make 150% just to get back to even. Only coming back 40% means you’re still down by a lot.
Here are two pieces of advice I’ve found helpful. The first is one I learned long ago, which
has stuck with me for nearly a decade.
It’s never far from top-of-mind whenever I begin a new project. The second is one I just heard this past
weekend on Sam
Harris’s Making Sense podcast interview
where he spoke with Shane Parrish of Farnam
Street.
One of my favorite stories that I find inspiring comes from the book, Final Jeopardy by Stephen Baker. In the book, Baker recounts the origin story of IBM’s Watson– specifically back in 2011, how IBM conceived and executed the project. The anecdote that’s always stuck with me is before they embarked upon this multi-billion dollar endeavor, IBM’s Watson team tasked a summer intern who’d just joined with the task of trying to create “Watson” with the most basic, off-the-shelf, open-source software that was commercially and freely available. They timeboxed it to three weeks and simply let the intern, a bright fellow, I’m sure, wander off into the interwebs and do his thing. The motivation behind this assignment was to develop a baseline not constrained by conventional thinking. It’d be incredibly humiliating and embarrassing if the IBM team poured billions into Watson only to have it outperformed by a garage project some rando created in his spare time.
I’ve always found this story compelling because it champions a scrappy and resourceful mindset. Forget all of the fancy tools, machine learning, expensive vendor solutions, etc. You’re not always the King of England with superior firepower, vast armies of men, and overwhelming force. Sometimes you’re Mel Gibson in Scotland and the only things you have are your own two bare hands and your wits. Learning to build a lean, mean, fighting machine is a healthy approach and good for the human spirit. After all: “Necessity is the mother of all invention.”
The second piece of advice comes from Shane Parrish/Warren
Buffett: Choose a domain of knowledge
that doesn’t change quickly (Eg. Not
technology.) This way you give your
knowledge base a chance to compound and grow.
If you are working in a fast-changing domain, the ground is always
shifting beneath your feet making it extremely difficult to build on your
terrain of knowledge.
Parrish cites Warren Buffet as an example who, famously, for
many decades shied away from technology because Buffett simply felt like he
didn’t understand it. (Now certainly,
and by
Buffett’s own admission, that ended up being a huge mistake and he left
billions on the table, but that’s beside the point.) Instead, Buffett focused his investments on
consumer staples and things like rail transportation. By focusing on just the few, slow-moving
industries that he knew well, Buffett was able to make tremendous amounts of
money.
